Principles by Ray Dalio

Part 1: The importance of principles
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1. What are principles?
2. Why are principles important?
3. Where do principles come from?
4. Do you have principles that you live your life by? What are they?
5. How well do you think they will work, and why?
   1. What are principles?
   Principles are what allow you to live a life consistent with your values. Principles guide you to act based on your values and help you make hard choices.
   2. Why are principles important?
   Without principles, you would be forced to react to circumstances that come to you without considering what you value most and how to make choices to get what you want. This prevents you from making the most of your life.
   3. Where do principles come from?
   It’s not necessarily bad to adopt others’ principles-it’s difficult to come up with your own. But adopting pre-packaged principles without much thought exposes you to the risk of inconsistency with your true values. Your principles need to reflect values you really believe in.
   4. Do you have principles that you live your life by? What are they?
   People who have shared values and principles get along, and people who don’t will suffer through constant misunderstandings and conflict with one another.
   5. How well do you think they will work, and why?
   Every time we face hard choices, we refine our principles by asking ourselves difficult questions. To be most effective, each principle must be consistent with your values, and this consistency demands that you ask: Why? By asking such questions, we refine our understanding, and the development of our principles becomes better aligned with our core values. You must be able to “cut off a leg to save a life”.

When evaluating others’ principles, ask yourself “Is it true?”
Part 2: My most fundamental life principles
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1. It isn’t easy for me to be confident that my opinions are right.
2. Bad opinions can be very costly.
3. The consensus is often wrong, so I have to be an independent thinker.
   –>
   A. I worked for what I wanted, not for what others wanted me to do. (All the work I ever did was just what I needed to do to get what I wanted. Since I always have the prerogative to not strive for what I wanted, I never felt forced to do anything.)
   B. I came up with the best independent opinions I could muster to get what I wanted.
   C. I stress-tested my opinions by having the smartest people I could find challenger them so I could find out where I was wrong. (I only cared the reasoning that led to conclusions by others.)
   D. I remained wary about being overconfident, and I figured out how to effectively deal with my not knowing. (I dealt with my not knowing by either continuing to gather information until I reached the point that I could be confident or by eliminating my exposure to the risks of not knowing.)
   E. I wrestled with my realities, reflected on the consequences of my decisions, and learned and improved from this process.
   I want you to work for yourself, to come up with independent opinions, to stress-test them, to be wary about being overconfident, and to reflect on the consequences of your decisions and constantly improve.
   I studied because I enjoyed it, not because I had to.

Since started Bridgewater, I have learned a lot from mistakes. Most importantly:

• Failure is by and large due to not accepting and successfully dealing with the realities of life, and achieving success is simply a matter of accepting and successfully dealing with all my realities. [Am I accepting the realities?]
• Finding out what is true, regardless of what that is, including all the stuff most people think is bad-like mistakes and personal weaknesses-is good because I can then deal with these things so that they don’t stand in my way.
• There is nothing to fear from truth. Being truthful, and letting others be completely truthful, allows me and others to fully explore our thoughts and exposes us to the feedback that is essential for our learning.
• I believe that people who are one way on the inside and believe that they need to be another way outside to please others become conflicted and often lose touch with what they really think and feel. It’s difficult for them to be happy and almost impossible for them to be at their best.
• I want the people I deal with to say what they really believe and to listen to what others say in reply, in order to find out what is true. One of the greatest sources of problems in our society arises from people having loads of wrong theories in their heads that they won’t test by speaking to the relevant people about them. Instead, they talk behind people’s backs, which leads to pervasive misinformation.
• Everyone makes mistakes and has weaknesses and one of the most important things that differentiate people is their approach to handling them. Each mistake was probably a reflection of something that I was (or others were) doing wrong, so if I could figure out what that was, I could learn how to be more effective. It was the pain of this wrestling that made me and those around me appreciate our successes.
• People who make the most of the process of encountering reality, especially the painful obstacles, learn the most and get what they want faster than people who do not.
  Being totally truthful, especially about mistakes and weaknesses, led to a rapid rate of improvement and movement toward what I wanted.

I found the approaches opposite than most others’.

• Others: learning what we are taught is the path to success; I: figuring out for yourself what you want and how to get it is a better path.
• Others: having answers is better than having questions; I: having questions is better than having answers because it leads to more learning. [knowledge could be grouped under questions rather than truth/categories]
• Others: mistakes are bad things; I: mistakes are good things because I believe that most learning comes via making mistakes and reflecting on them.
• Others: finding out about one’s weaknesses is a bad thing; I: it is a good thing because it is the first step toward finding out what to do about them and not letting them stand in your way.
• Others: pain is bad; I: pain is required to become stronger.

What I wanted was to have an interesting, diverse life filled with lots of learning-and especially meaningful work and meaningful relationships.
My most fundamental principles:

• I believe that we need to deeply understand, accept, and work with reality in order to get what we want out of life. Whether it is knowing how people really think and behave when dealing with them, or how things really work on a material level-so that if we do X then Y will happen-understanding reality gives us the power to get what we want out of life, or at least to dramatically improve our odds of success.
• I believe there are an infinite number of laws of the universe and that all progress or dreams achieved come from operating in a way that’s consistent with them.
• My most fundamental principle: Truth-more precisely, an accurate understanding of reality-is the essential foundation for producing good outcomes.
• I believe that evolution, which is the natural movement toward better adaptation, is the greatest single force in the universe, and that it is good.
• I believe that the desire to evolve, i.e., to get better, is probably humanity’s most pervasive driving force. [I can’t agree more.] It is the evolution and not the reward itself that matters to us and those around us.
• Because of the law of diminishing returns, it is only natural that seeking something new, or seeking new depths of something old, is required to bring us satisfaction.
• The sequence of 1. seeking new things (goals); 2. working and learning in the process of pursuing these goals; 3. obtaining these goals; and 4. then doing this over and over again is the personal evolutionary process that fulfills most of us and moves society forward.
• I believe that pursuing self-interest in harmony with the laws of the universe and contributing to evolution is universally rewarded, and what I call “good”. [You may not considering help evolution, but you typically do.]
• How much money people have earned is a rough measure of how much they gave society what it wanted-NOT how much they desired to make money. [This is reminds me of the investment in stocks. You want to invest in stocks those are undervalued. You also want to be around people who are undervalued.]
• Adaptation is a big part of the evolutionary process, and it is rewarded.
• We all have things that we value that we want and we all have strengths and weakness that affect our paths for getting them. The most important quality that differentiates successful people from unsuccessful people is our capacity to learn and adapt to these things. [Could a person be both creative and great with the details?]
• It is tragic when people let ego barriers lead them to experience bad outcomes.

The personal evolutionary process
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• The quality of our lives depends on the quality of the decisions we make.
• We are not born with the ability to make good decisions; we learn it.
• Reality + Dreams + Determination = A successful life
• For most people happiness is much more determined by how things turn out relative to their expectations rather than the absolute level of their conditions.

Your most important choices

• First: 1. Bad: …Allow pain to stand in the way of their progress. 2. Good: …Understand how to manage pain to produce progress.
  It is a fundamental law of nature that to evolve one has to push one’s limits, which is painful, in order to gain strength-whether it’s in the form of lifting weights, facing problems head-on, or in any other way. Both pain and strength typically result from encountering one’s barriers. When we encounter pain, we are at an important juncture in our decision-making process. [One can not evolve avoiding pain.]
• most people have “fight or flight” reactions to pain: they either strike out at whatever brought them the pain or they try to run away from it. As a result, they don’t learn to find ways around their barriers, so they encounter them over and over again and make little or no progress toward what they want.
• most learning come from making mistakes, reflecting on the causes of the mistakes, and learning what to do differently in the future. The only way you are going to find solutions to painful problems is by thinking deeply about them-i.e., reflecting-if you can develop a knee-jerk reaction to pain that is to reflect rather than to fight or flee, it will lead to your rapid learning/evolving. The more difficult the problem, the more important it is that you think.
• Pain + Reflection = Progress
• Second: 1. Bad: …Avoid facing “harsh realities.” 2. Good: …Face “harsh realities.”
• People who know that understanding what is real is the first step toward optimally dealing with it make better decisions. Ask yourself, “Is it true?”
• Third: 1. Bad: …Worry about appearing good. 2. Good: …Worry about achieving the goal.
• What are your biggest weaknesses? Think honestly about them because if you can identify them, you are on the first step toward accelerating your movement forward. So think about them, write them down, and look at them frequently. (Be around people who are good at things you are bad at.)
• Fourth: 1. Bad: …Make their decisions on the basis of first-order consequences. 2. Good: …Make their decisions on the basis of first-, second- and third-order consequences.
• Quite often the first-order consequences are the temptations that cost us what we really want, and sometimes they are barriers that stand in our way of getting what we want.
• Fifth: 1. Bad: …Don’t hold themselves accountable. 2. Good: …Hold themselves accountable.
• Successful people understand that bad things come at everyone and that it is their responsibility to make their lives what they want them to be by successfully dealing with whatever challenges they face.
• In summary, I believe that you can probably get what you want out of life if you can suspend your ego and take a no-excuses approach to achieving your goals with open-mindedness, determination, and courage, especially if you rely on the help of people who are strong in areas that you are weak.

Your two yous and your machine
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• Your perspective is of one who is looking down on at your machine and yourself objectively. Your most important role is to step back and design, operate and improve your “machine” to get what you want.

• Think of it as though there are two yous-you as the designer and overseer of the plan to achieve your goals (you(1)) and you as one of the participants in pursuing that mission (you (2)).
• If you(1) see that you(2) are not capable of doing something, then fire yourself(2) and find a good replacement!
• The biggest mistake most people make is to not see themselves and others objectively. If they could just get around this, they could live up to their potentials.

My 5-step process to getting what you want out of life
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1. Have clear goals.
2. Identify and don’t tolerate the problems that stand in the way of achieving your goals.
3. Accurately diagnose these problems.
4. Design plans that explicitly lay out tasks that will get you around your problems and on to your goals.
5. Implement these planks-i.e., do these tasks.

More details:

1. You must approach these as distinct steps rather than blur them together.
2. Each of these five steps requires different talents and disciplines.
3. It is essential to approach this process in a very clear-headed, rational way rather than emotionally.

• To help reduce the pressures: treat your life like a game or a martial art. Your mission is to figure out how to get around your challenges to get to your goals. The big and really great news is that you don’t need to have all of these skills to suceed! You just have to 1) know they are needed; 2) know you don’t have some of them; 3) figure out how to get them (i.e., either learn them or work with others who have them).
• By and large, life will give you what you deserve not what you “like”. So it’s up to you to take full responsibility to connect what you want with what you need to do to get it.

The 5 steps close-up

1. Setting goals
   You can have virtually anything you want, but you can’t have everything you want.
   • Some people are afraid to reject a good alternative for fear that the loss will deprive them of some essential ingredient to their personal happiness. As a result, they pursue too many goals at the same time, achieving few or none of them. So it’s important to remember: it doesn’t really matter if some things are unavailable to you, because the selection of what IS available is so great. You may have enormous amount: much, much more than what you need to have for a happy life.
   • To achieve your goals you have to prioritize, and that includes rejecting good alternatives (so that you have the time and resources to pursue even better ones-time being probably your greatest limiting factor.)
   • It is important not to confuse “goals” and “desires”. Desires may be bad. You need to know the consequence of desires before you follow your desires.
   • Avoid setting goals based on what you think you can achieve.
   • There is almost no reason not to succeed if you take the attitude of 1) total flexibility-good answers can come from anyone or anywhere (and in fact, as I have mentioned, there are far more good answers “out there” than there are in you) and 2) total accountability: regardless of where the good answers come from, it’s your job to find them.
   • Achieving your goals isn’t just about moving forward.
2. Identifying and not tolerating problems
   • Most problems are potential improvements screaming at you.
   • The more painful the problem, the louder it is screaming. In order to succeed, you have to 1) perceive problems and 2) not tolerate them.
   • It is essential to bring problems to the surface.
   • When identifying problems, it is important to remain centered and logical.
   • Identifying problems is like finding gems embedded in puzzles; if you solve the puzzles you will get the gems that will make your life much better. Doing this continuously will lead to your rapid evolution. So, if you’re logical, you really should get excited about finding problems because identifying them will bring you closer to your goals.
   • Be very precise in specifying your problems.
   • Don’t confuse problems with causes.
   • Once you identify your problems, you must not tolerate them.
3. Diagnosing the problems
   • You will be much more effective if you focus on diagnosis and design rather than jumping to solutions.
   • You must be calm and logical.
   • You must get at the root causes. Root causes are typically described with adjectives, usually characteristics about what the person is like that lead them to an action or an inaction.
   • Recognizing and learning from one’s mistakes and the mistakes of others who affect outcomes is critical to eliminating problems.
   • To be successful, you must be willing to look at your own and others’ behaviors as possible causes of problems.
   • The most important qualities for successfully diagnosing problems are logic, the ability to see multiple possibilities, and the willingness to touch people’s nerves to overcome the ego barriers that stand in the way of truth.
4. Designing the plan (determining the solutions)

To be continued…